Tsunami Hasn't Put Out Dragon's Fire

It will take more than a tsunami and the potential for a nuclear disaster in Japan to divert the People’s Bank of China from its efforts to tame inflation.

China’s central bank has raised reserve requirements for the country’s biggest banks by another 0.5 percentage points, to 20%, effective March 25. This is the third increase in the reserve requirement in 2011, and will require banks to put an additional $53 billion into reserves.

Money that goes into reserves is money that can’t be lent. That slows the economy, and pushes against rising inflation.

Economists are forecasting that inflation will pick up to a 6% annual rate in March. That would be the fastest increase in prices since July 2008.

Inflation at the consumer level was an annual 4.9% in February—but producer prices climbed at a 7.2% annual rate, suggesting that higher consumer inflation is in the pipeline. Beijing’s target rate for inflation is 4% for 2011.

An increase from the February 4.9% rate would set up the People’s Bank for another increase in its benchmark interest rate, now at 6.06%. The bank has raised that rate three times since mid-October.

The move by the People’s Bank—following yesterday’s interest-rate increase by the Reserve Bank of India, the eighth in 12 months, to 6.75%—argues that central banks in developing economies remain committed to fighting inflation despite the disaster in Japan.

If you want to find a positive note in that, it’s this: In their judgment, the disaster in Japan won’t knock enough off global GDP, in the months ahead, to relieve inflationary pressures in their economies.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of January, see the fund’s portfolio here.